CANADA FX DEBT-C$ weakens to US$ parity briefly ahead of Fed
* C$0.9987 vs US$, or $1.0013
* Briefly touches parity with U.S. dollar
* Canada CPI stronger than expected
* Focus on FOMC outcome at 2.15 p.m. (1815 GMT)
* Bond prices lower, Canada underperforms (Updates with drop to parity, adds comment)
By Andrea Hopkins
TORONTO, Sept 21 (Reuters) - The Canadian dollar weakened to parity with its U.S. counterpart on Wednesday morning, shrugging off higher-than-expected Canadian inflation data as global markets awaited the outcome of the U.S. Federal Reserve's closely watched policy meeting.
The Canadian currency had last touched parity on Sept. 12. Traders said the Canadian dollar was simply catching up to the weakness of other commodity-linked currencies after being temporarily buoyed by the higher-than-expected inflation data.
"A lot of other currencies had been weaker overnight. There is a sense of foreboding hanging over markets and Canada sort of avoided it with CPI earlier today, but now we're heading back to the pack," said David Watt, senior currency strategist at Royal Bank of Canada.
"I don't think the market necessarily treats the parity mark all that significantly, but obviously Canadians do. But ... we're really just catching up with the market."
At 9:18 a.m. (1318 GMT), the Canadian dollar CAD=D4 stood at C$0.9987 to the U.S. dollar, or $1.0013, below Tuesday's North American session close of C$0.9936 to the U.S. dollar, or $1.0064 U.S. cents.
It weakened to parity earlier, dropping as low as C$1.0001 to the U.S. dollar, or 99.99 U.S. cents.
World stocks drifted lower and the euro also slipped ahead of the Fed's closely watched Federal Open Market Committee (FOMC) policy meeting, with concerns about a possible Greek default weighing on investor sentiment.
Those persisting concerns about Greek sovereign debt limited any excitement ahead of the Fed, with Greece and international lenders yet to reach a deal to allow Athens more funds despite some progress. [MKTS/GLOB]
The Fed is expected to announce at 2:15 p.m. (1815 GMT) plans to shift its portfolio in favor of longer-dated bonds and so push long-term interest rates - already near historic lows - even lower in a move known as Operation Twist. [ID:nFEDAHEAD]
The Canadian dollar briefly pared losses against its U.S. counterpart after Canadian consumer price data came in stronger than expected, but the currency then weakened back to pre data levels, below Tuesday's session close.
"We got a little bit of a bounce after a slightly strong CPI data, but really I think the market has got two things on its mind. Number one, comments from (Bank of Canada) Governor (Mark) Carney that were a little more dovish, and more importantly, the FOMC later today," said Steve Butler, director of foreign exchange trading at Scotia Capital.
Canadian data showed the annual inflation rate increased to a higher-than-expected 3.1 percent in August, but analysts said this was unlikely to worry the Bank of Canada, which is more concerned about problems in Europe and the United States.
Market operators had expected the annual rate to rise to 2.9 percent from the 2.7 percent recorded in July. [ID:nS1E78K04J]
Analysts noted the currency briefly strengthened as the inflation report cooled some market speculation that the Bank of Canada will cut interest rates.
Overnight index swaps, which trade based on expectations for the central bank's main policy rate, showed that traders priced in lower odds of a rate cut this year or next after the data. BOCWATCH
Bond prices were lower across the curve and underperformed U.S. Treasuries.
The two-year bond CA2YT=RR was down 4.5 Canadian cents to yield 0.962 percent, while the 10-year bond CA10YT=RR was down 21 Canadian cents to yield 2.220 percent. (Editing by Peter Galloway)
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